The defendants in 233 adversary proceedings had sought to have complaints filed by the trustee, Irving H. Picard, dismissed.

NEW YORK (The Deal) -- A New York judge has ruled the trustee liquidating Bernard L. Madoff Investment Securities can recover false profits from the brokerage's former customers.

Judge Stuart Bernstein of the U.S. Bankruptcy Court for the Southern District of New Yorkin Manhattan ruled Tuesday that Securities Investor Protection Act trustee Irving H. Picard could claw back money from certain former customers. These "net winners" withdrew more than they deposited into Madoff's securities company (BLMIS), and Picard wants to recover these "fictitious profits" in the Ponzi scheme.

These are limited to intentional fraudulent transfers made in the two years before the securities company went into receivership on Dec. 15, 2008. Proceedings in the case take place in bankruptcy court. The defendants in 233 adversary proceedings had sought to have complaints filed by Picard dismissed.

Bernstein, however, ruled, "Fictitious profits are not profits at all but distributions of other people's money based on an arbitrary allocation of fraudulent bookkeeping entries." He later added, "Once it is determined that a Ponzi scheme exists, all transfers made in furtherance of that Ponzi scheme are presumed to have been made with fraudulent intent."

Picard had filed a motion Friday seeking permission to enter into a deal with two Madoff feeder funds.

Under the terms of the settlement, Ariel Fund would hand over $17.9 million to the BLMIS customer fund, while Gabriel Capital would put $17 million into the fund. That money represents 100% of the amount transferred from BLMIS to the funds. Ariel Fund would receive an allowed claim of about $189.4 million, while Gabriel Capital would receive a $178.4 million claim. A hearing on the matter is set for June 24.